Rapidly rising age pension costs need to be addressed

Increased longevity is often a good thing for those who retain their health. It is a bad thing for the budget. Unfortunately, the recommendations in the white paper from the Actuaries Institute on the “Longevity Tsunami" would not cut the overall budgetary cost of subsidies for retirement incomes.

Some of the institute’s policy ideas are fine, such as encouraging people to work longer and indexing eligibility for the age pension to increases in longevity. But the full package does little to attack the core problem that the combined cost of the age pension and the superannuation tax concessions is raising faster than government revenues. Yet these welfare subsidies add almost nothing to productivity.

The budget projections show age pension costs rising from $36.8 billion in 2012-13 to $44.9 billion in 2015-16 and the super concessions from $32.1 billion to $45.1 billion. More conservative estimates lower the costs for super by about a third. Either way, they will increase rapidly as the rise in the compulsory contributions from 9 per cent of salaries to 12 per cent is phased in. Although forcing people to allocate more of their income in this fashion is supposed to cut the age pension costs, the Henry tax review noted that the added cost of the concessions would outweigh these budgetary gains.

Radical surgery is needed on the age pension. The 2008 Australian Actuary of the Year Darren Wickham has proposed abolishing any set qualifying age for the pension. He says no one should be able to receive the pension while able to work. The unfit could go on the disability pension.

More modest reforms would tighten the present means test that allows a couple to have over $1 million in assets, excluding their home, and still get a part pension.

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The Productivity Commission’s report on age care proposed that the means test should include the value of the family home. The report also criticised the existing super system, saying: “Compulsory saving imposes a deadweight loss as it distorts decisions about which savings vehicles to use, as well as between consumption and savings."

Bank of America Merrill Lynch economist
Saul Eslake
describes the Howard government’s exemption of super income and payouts from tax after age 60 as one of the worst policy decisions of the past 20 years.

Eslake told a tax forum last October: “I can’t think of any legitimate policy objectives which justify some people paying less tax than others on the same income purely because of their age."

However, the Actuaries Institute’s white paper on the longevity tsunami stays well clear of the potentially large budget savings available in these areas.